PepsiCo credits ‘courageous’ pricing as brand investment ‘pays off’

PepsiCo believes it is reaping the rewards of continued brand investment, as consumers appear willing to “follow” its products as inflation pushes them to higher price points.

Sharing the company’s third quarter results on an analyst call today (12 October), CEO and chairman Ramon Laguarta claimed his teams have been “courageous” in the pricing of large bags of snacks and in-home formats across Western Europe, especially given the continent has been so adversely impacted by the cost crisis.

He explained European teams have had to “lean into revenue management” more strongly than in other regions, despite benefitting from a “good summer” which drove impulse sales of products with a higher price per litre or price per kilo ratio. This involved a combination of visual pricing and channel management, the PepsiCo CEO said.

“The truth is the investment we’ve made in our brands in the last few years is paying off, in the sense our brands are being stretched to higher price points and consumers are following us in Europe and in other parts of the world,” said Laguarta.

PepsiCo’s ‘strong’ brand and innovation programmes drive growth despite inflation

While admitting the current environment is fraught with inflationary issues and supply chain challenges, he insisted the philosophy remains the same, including continuing to invest in advertising and marketing, innovation and “strong commercial plans.”

“We’re trying to be growth drivers to our customers. If you look at the majority of our conversation with our customers, it centres around growth and how do we develop our categories and bring consumers into the category, and continue to bring new occasions into the category. That’s the role we play to our customers and how we create value for the company long term,” Laguarta stated.

“We’ll continue with that focus, trying to create brands that can stand for higher value to consumers and consumers are willing to pay more for.”

PepsiCo saw net revenue rise by 8.8% to $21.97bn (£19.9bn) during the third quarter, with an operating profit of $3.35bn (£3.03bn).

In Europe, revenue rose to $3.65bn (£3.30bn), compared to $3.61bn (£3.26bn) during the same period in 2021, while operating profit grew by 28% to $564m (£510m).

We’re trying to be growth drivers to our customers. If you look at the majority of our conversation with our customers, it centres around growth.

Ramon Laguarta, PepsiCo

Within the US crisp division Frito-Lay, the core operating profit rose by 17%, reflecting what PepsiCo describes as the inflationary pressures and a double-digit increase in advertising and marketing spend. Elsewhere, the Quaker Foods North America division delivered 16% organic revenue growth in the third quarter.

Laguarta explained the last two years have taught the company to become more agile, nimble and flexible, which is an ongoing focus. Yet, despite the recent upheaval, PepsiCo believes its products will remain relevant, with affordable treats expected to prove popular with consumers regardless of the inflation crisis.

He identified multiple ways the company intends to increase its revenue per kilo/revenue per litre, from visual pricing to lower promotions, pushing for higher revenue formats and moving into channels where PepsiCo can set a higher price due to consumers having “different price expectations”.

The business will also push into more digital formats, aiming to become a “much more insightful and precise” company, an approach which also applies to managing its supply chain.

Laguarta claimed the team are able to “cope with higher levels of complexity” due to strict processes around portfolio optimisation. These processes run quarterly across each of PepsiCo’s businesses and are said to involve rationalisation and elimination of unnecessary complexity.

“On the one side, we want to have more complexity because we know consumers appreciate personalisation and a lot of the variety is a key advantage for us in our categories. But at the same time we go through rigid processes that eliminate unnecessary complexity and keep our costs down,” the PepsiCo CEO explained.

Managed evolution

According to Laguarta, PepsiCo notched up market share gains of 70-75% in the food, convenience foods and salty snacks sector, alongside 70% gains in the beverage market internationally.

He noted Frito-Lay had accelerated its share gains during a strong third quarter, while the business saw share gains in tea and coffees products.

Within the Quaker Foods North America division, the business highlighted the importance of brand building investments, fuelled by a high-single-digit increase in advertising and marketing spend, coupled with innovation. This included the launch in the US of the Quaker On-The-Go Snack Multipack, Quaker Puffed Granola and Quaker Oat Flour.

“Pepsi is doing quite well and Mountain Dew is a brand that we’re working on to continue to gain share,” Laguarta added.

PepsiCo enjoyed a “very good performance” in the sports sector, a priority category for the business. Looking specifically at the Gatorade drinks brand, the CEO claimed continued investment in innovation and brand building over the past couple of years is working, helping the division gain “meaningful share” during the quarter.

PepsiCo makes customer retention its ‘number one objective’ as cost of living spirals

On innovation, Laguarta pointed to the “great success” of the Gatorade Zero no sugar product, which has reengaged lapsed consumers who left the brand due to its sugar content. He also noted the ability of the Gatorlyte electrolyte-infused drink and GFit products to attract incremental consumers to the brand.

Launched last month, the Gatorade Fast Twitch energy drink is an innovation where the company sees the potential to offer professional athletes a mix of caffeine and hydration. PepsiCo has kicked off a tie-up with the NFL to give teams exclusive access to the drink in the 2022/2023 season, with a full consumer rollout planned in February.

Within the wider PepsiCo Beverages North America division, the intention is to “optimise” the advertising and marketing spend and advance revenue management in a bid to “manage the evolution” of the product portfolio.

In the UK specifically, the business plans to launch lower salt and saturated fat varieties of its Walkers and Doritos brands to provide “smarter snacking choices”.

Given the company’s year-to-date performance, PepsiCo now expects its full-year organic revenue to increase by 12%, up on the 10% figure previously forecasted.

“If we’re gaining share in many markets across our geographies, both in snacks and beverages, we should assume that given the investments we’re making and the quality of brands and people we have in a lot of the markets, in the future we will continue to gain share. At least that’s our aspiration,” said Laguarta. “We will continue to invest and get better every quarter.”